NEWS ANALYSIS: Forest products firm Norske Skog was once one of Norway’s top industrial companies, founded by forest owners in 1962 and still one of the world’s largest producers of paper for publications. Now it’s struggling to ward off bankruptcy after an international expansion program left it saddled with debt, while new technology has cut demand for its products.
With annual sales of around NOK 12 billion, operations on five continents and 2,500 employees, Norske Skog is still an important company in Norway. That’s why its fate is now on the agenda of national politicians running for election next month. An industrial crisis just weeks before the September 11 parliamentary election is the last thing incumbent Prime Minister Erna Solberg wants, prompting her to tell newspaper Dagens Næringsliv (DN) last week that her Conservatives-led government coalition was worried about Norske Skog and evaluating whether it’s possible for the state to assist.
That set off immediate debate, both among investors and politicians, and Trade Minister Monica Mæland later clarified that the state wouldn’t interfere with Norske Skog’s debt negotiations with creditors. Both of the conservative government coalition’s support parties are positive to the idea of aiding Norske Skog, however, while the Labour Party’s Trond Giske told DN it wouldn’t support taking over Norske Skog’s debt. Labour’s potential government partner, the Center Party, has proposed an all-out state acquisition of Norske Skog to preserve industrial jobs in outlying areas, indicating that Labour and Center disagree. Mæland of the rival conservative coalition has claimed it’s still too early to make any concrete proposals.
“Norske Skog is a private company that is now in important debt negotiations,” Mæland wrote in an email to newspaper Dagsavisen. “This is a process in which the state, of course, won’t get involved.” At the same time, however, Mæland acknowledged that Norske Skog is a large and important Norwegian company.
“We hope that the company reaches its goals in the negotiations,” she wrote. “We won’t contribute to speculation about what will happen if they don’t succeed. We’ll need to evaluate that if the situation arises.”
A representative for around 800 employees at the Norske Skog Saugbrug plant in Halden nonetheless blamed the government for failing to provide a better competitive framework for the company. Paul Kristiansen complained that the government, for example, rejected company requests for CO2 compensation. “We don’t need charity from the Norwegian state to survive,” Kristiansen told Dagsavisen, “we need a better framework.” He attributed all talk about state aid to “campaign posturing.”
Norske Skog’s CEO in Halden, Kjell-Arve Kure, said management and employees were trying to maintain normal operations despite all uncertainty over the company’s heavy debt. Both of Norske Skog’s Norwegian operations, in Halden and Skogn in Nord-Trøndelag, are actually doing well but Kure also seeks “a better framework” including better roads for transporting timber. He welcomes the political engagement.
Professor traces Norske Skog’s path to trouble
A professor at the University of Oslo, Bjørnar Sæther, points, meanwhile, to two main reasons for Norske Skog’s problems over the past several years: The company’s international expansion was financed by loans that have become too difficult to service, and the introduction of smart phones has had severe consequences for newspapers and magazines that are Norske Skog’s paper customers.
Sæther traced Norske Skog’s history in a commentary published in DN on Monday, in an attempt to explain “how things could go so wrong” at a company that was so successful. “This was once Norway’s most future-oriented industrial company with a leading global position and strong economic results for decades,” Sæther wrote. The start-up of its newspaper plant at Skogn in 1967 marked the beginning of 35 years of expansion.
Sæther noted that the “clever” forest owners who got together to launch Norske Skog soon gained control over large parts of the forestry business in Norway, a country rich in timber. They took over Union in Skien, Follum at Hønefoss and Tofte at Hurum. By the 1990s Norske Skog had control over 80 percent of Norway’s forest products business.
Thirst for growth led to a hangover
New managers at Norske Skog, and the consultants they hired in, then started seeking more growth outside Norway. Sæther noted how they expanded into Europe, building a new newspaper plant in Golbey in France. Company officials also decided to concentrate on paper for publishing ventures and raised capital for their expansion by selling off Norwegian businesses not directly involved in such paper products.
The Hurum cellulose operation in Norway was thus sold, as were others, over the concerns and objections of forest owners and employees. The new managers and their consultants had other ambitions, also for global expansion, leading ultimately to taking on debt to finance acquisitions in Australia, China, South Korea, Chile and Canada. The biggest deal came in 2000 when Norske Skog bought New Zealand-based Fletcher Challenge for NOK 20 billion, the largest foreign investment ever made by a Norwegian company.
The thrill of the expansion didn’t last long, as debt built up. “The debt Norske Skog took on, first and foremost with the purchase of Fletcher Challenge, is what’s caused the main problem today,” Sæther wrote. “Earnings over the years haven’t been sufficient to service the debt.”
Misguided growth ambitions
Now the expansion has come back to haunt Norske Skog, along with its concentration on what the company calls “publication paper.” Other forestry firms in Sweden and Finland remained more diversified and are thus in much better shape now than Norske Skog. Their own shutdowns of newspaper plants, for example, have occurred without threatening the companies themselves.
Sæther blames the decisions made in the 1990s: “Loan-financed purchases of newspaper plants have been shown to have dramatic consequences both for Norske Skog and for the entire forestry industry,” he wrote. “Maybe the prime minister’s signals on a possible state rescue can save the plants in Halden and Skogn? Let’s hope the prime minister’s offer doesn’t expire on September 11, 2017 (Election Day in Norway).”
On Tuesday newspaper Aftenposten editorialized that Norske Skog “must clean up after itself” and not expect any state bailout. “Their debt is gigantic, at more than NOK 6 billion,” the newspaper, in a branch that still needs Norske Skog’s main product, wrote. “Not even good operating results will be enough to service that debt, or save the company as it exists today.” Aftenposten claimed Norske Skog’s problems should not become a political issue: “We have had a tradition of sending the state in as a rescuer of poorly managed companies … that time is fortunately over.” Bankruptcy and a restructuring thus remain the alternatives.